Merkel's CDU hoping for comeback win in key state vote

Sat Jan 19, 2013 6:16pm EST

* Lower Saxony vote on Sunday kicks off German election year

* Merkel's CDU bounce back strongly in fourth-largest state

* Cliff-hanger vote between centre-right and centre-left

By Erik Kirschbaum

HANOVER, Jan 20 (Reuters) - German Chancellor Angela Merkel's Christian Democrats are hoping for victory in a state contest on Sunday that could end a long losing streak and set the tone for September's federal election.

Citizens in the northern state of Lower Saxony will begin voting at 8 a.m. on Sunday (0700 GMT) in what has been a riveting battle between Merkel's centre-right coalition and the centre-left Social Democrat-Greens opposition.

Led by state premier David McAllister, the CDU and their Free Democrat (FDP) allies have drawn even in opinion polls with their opponents, each on 46 percent, even though the centre-right trailed by 13 points in voter surveys through mid-2012.

"The winds in Lower Saxony have turned and you can feel that everywhere you go," McAllister told German TV after a rally. First projections are expected once polls close at 6 p.m. and preliminary results are due within an hour.

Merkel, the most popular politician in Germany thanks to her handling of the euro zone debt crisis, hopes a victory for the centre-right in Lower Saxony, an industrial and farming heartland, would give her re-election campaign a boost ahead of the September federal vote.

The comeback in Lower Saxony has turned Germany's fourth-most populous state -- a genuine swing state -- into a ferocious battleground with Merkel appearing seven times to campaign with McAllister, the West Berlin-raised son of a British soldier.

MERKEL'S "MAC"

McAllister, known as "Mac", has played up his Scottish roots in his campaign, which has featured bagpipes and the jingle "Our chieftain is a Scot/We're a tough clan".

The SPD and the Greens, who had long been comfortably ahead of the centre-right incumbents in polls, have watched in horror as their lead evaporated. Local SPD leader Stephan Weil has been hurt by gaffe-prone SPD chancellor candidate Peer Steinbrueck.

Weil, a solid if less colourful politician, is mayor of the state capital Hanover. He first embraced Steinbrueck during 2012 but has kept his distance since the SPD chancellor candidate blundered - complaining about the pay level for German leaders and saying Merkel has an advantage because of her gender.

Many would blame Steinbrueck if the SPD failed to take power in the state, raising questions about his candidacy and complicating his chances of dislodging Merkel in September.

In a sign of the party's nervousness, Steinbrueck and party leader Sigmar Gabriel met privately on Friday to discuss how to react to a defeat, German media reported.

Weil has pointed to polls showing a neck-and-neck race. The CDU were on 41 percent in a final poll on Thursday while the FDP were at the 5 percent threshold needed for seats in the state assembly. The SPD were on 33 percent and the Greens 13.

"Let's put this one in the bag," Weil told a Friday rally.

The CDU have suffered setbacks in the last 12 state elections and since Merkel's re-election in 2009 lost power entirely to the SPD and Greens in four important states: Hamburg; Baden-Wuerttenberg, North Rhine-Westphalia and Schleswig-Holstein.

But even if the CDU wins the most votes, their centre-right coalition could be defeated if the FDP does not clear the 5 percent threshold.

That is a similar problem to the one Merkel faces at the national level, where the CDU is well ahead of the SPD but doubts remain about whether the FDP will rise from the 4 percent they are getting in polls now.

Even though it is now considered likely the FDP will win at least 5 percent in Lower Saxony, FDP national leader Philipp Roesler could be forced to resign if his party falls short of or just scrapes past the threshold.

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RPT-INVESTMENT FOCUS-Once wary markets warm to Merkel status quo

Sun Jan 20, 2013 1:00am EST

By Mike Dolan

LONDON Jan 18 (Reuters) - As the euro crisis raged at its peak just over a year ago, few global investors reckoned Angela Merkel's re-election as German Chancellor this year was likely or even desirable.

Now they appear to be assuming both - thanks partly to her gaffe-prone Social Democrat opponent but perhaps as much or more so to European Central Bank chief Mario Draghi and his success in stabilising the teetering currency bloc last year.

As Sunday's state elections in Lower Saxony give investors an early glimpse of how September's federal elections may play out, Merkel has a commanding poll lead over Peer Steinbrueck as Germany's favoured next Chancellor.

The constellation of coalition government she will be able to form is far more in question, but investment strategists see status quo in the chancellery at least as the best bet for sustained rehabilitation of the battered euro bloc, and, by extension, economic stabilisation home and abroad.

Sunday will show whether Merkel's Christian Democrats (CDU) and Free Democrat (FDP) allies - now neck and neck in opinion polls with the centre-left pairing of Social Democrats and Greens - can hold the country's fourth most populous state and herald a turnaround after drubbings in 12 regional elections since 2009.

For overseas money managers who claim to see few major differences between the two sides on critical euro or domestic economic policies, the familiarity of Merkel's existing government and her crisis management now seems to offer greater comfort.

And yet this has only really taken shape since last July, when Draghi's "whatever it takes" pledge to defend the euro defused the explosive sovereign debt crisis.

Back in 2011, investors fretted about whether Merkel and her coalition had the will, the plan or the public backing to keep supporting Greece and other ailing euro governments while staying committed to the euro via deeper integration.

As markets dumped the problem debtors of the euro zone periphery and the prospect loomed of ever more bailouts and deepening recession, Merkel's domestic popularity reached a similarly low ebb.

But these have reinforced each other on the upside too.

Euro stabilisation - which has almost halved Italian and Spanish borrowing costs from their respective crisis peaks over the past 16 months - has fed Merkel's domestic popularity and the rebound in her popularity now looks as if it may reinforce the euro recovery.

And despite the recent slowing, the German economy itself remains impressively near full employment while German stock prices gained a whopping 30 percent in 2012.

"To simplify it a lot, Merkel's popularity has been inversely correlated with the yields on peripheral euro bonds," said Alex Godwin, Global Head of Asset Allocation at Citi Private Bank in London.

"Arguably, the biggest supporter of Merkel's re-election has been Mario Draghi. By staving off a disaster and stabilising the situation, he has made the last two years of euro zone politics look much more successful than it seemed at the time."

Godwin said what's become clearer to outside observers over the past year - and perhaps to many German politicians too - is just how much German public opinion still favours holding the euro together, for all its wariness about endless bailouts.

"Germans seemed genuinely scared of the prospect of a Greek exit or euro collapse," he said. "And anti-euro rhetoric or bailout opposition has never really chimed with the electorate. So Merkel's 'carrot-and-stick' approach is the balance that most inside and outside the country are happiest with."

Franz Wenzel, chief investment strategist at AXA Investment Managers in Paris, feels the full-term review of Merkel outside the country very much tallies with her surging poll ratings.

"Investors would now be worried about a government without Merkel," he said. "She has done a fairly good job in a very difficult period, she's been a guarantor of the euro zone, a safe haven in a turbulent environment, and the German economy in terms of key employment metrics still looks fine."

COALITION MATHS

Others are more worried about coalition maths, however, and the implications for a new Merkel-led federal government later this year. This is why Sunday's regional poll may act as a bellwether.

"If she did badly this weekend, then it could surprise markets and unnerve people about how the smaller parts swing the next government," said Peter Westaway, chief European economist at fund manager Vanguard, adding that this would affect perceptions of policy timing and volatility rather than basic assumptions about European policy.

If the SPD and Greens do take Lower Saxony, some analysts say their increased strength in Germany's upper house, the Bundesrat, could frustrate and block more legislative proposals. While some reckon this is already possible anyway, Commerzbank analysts say a formal blocking majority could give the impression of a "lame duck" federal government before September.

To be sure, strategists say a national SDP/Green government later this year could favour euro integration even more than the CDU, at least partly offsetting market concerns about their emphasis on stricter regulation of banks and higher wealth taxes.

"From a euro crisis perspective, it's difficult to imagine an event that could drastically change things in an anti-euro way," said Kevin Gardiner, head of investment strategy EMEA, Barclays Wealth.

Yet the fate of key Merkel allies and euro bailout sceptics FDP may be a more potent signal on Sunday, raising serious questions about whether they can command the necessary 5 percent minimum to enter the Bundestag later this year. If they can't, it would limit Merkel's coalition options and threaten her bid for the top job in the absence of a grand coalition.

Bernhard Speyer, joint head of Deutsche Bank Research in Frankfurt, said a Merkel re-election in some format is clearly now what the electorate and financial markets seem most comfortable with but he reckons this Sunday's vote could raise questions about the outcome even if her CDU is victorious.

"If the SPD get a real drubbing, it could prompt an internal debate on whether they have the right candidate for Chancellor and a change of name at this stage would be a wild card."

The other risk is that Merkel has a lot of difficulty putting together a coalition and faces a more antagonistic SPD even in a 'grand coalition', Speyer said.

"That could mean a prolonged period of introspection, which is always a distraction from responsibilities abroad."

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UPDATE 1-Merkel's CDU hoping for comeback win in key state vote

Sun Jan 20, 2013 2:37am EST

* Lower Saxony vote on Sunday kicks off German election year

* Merkel's CDU bounce back strongly in fourth-largest state

* Cliff-hanger vote between centre-right and centre-left

By Erik Kirschbaum

HANOVER, Jan 20 (Reuters) - German Chancellor Angela Merkel's Christian Democrats are hoping for victory in a state contest on Sunday that could end a long losing streak and set the tone for September's federal election.

Citizens in the northern state of Lower Saxony began voting at 8 a.m. on Sunday (0700 GMT) in what is expected to be a close battle between Merkel's centre-right coalition and the centre-left Social Democrat-Greens opposition.

Led by state premier David McAllister, the CDU and their Free Democrat (FDP) allies have drawn even in opinion polls with their opponents, each on 46 percent, even though the centre-right trailed by 13 points in voter surveys through mid-2012.

"The winds in Lower Saxony have turned and you can feel that everywhere you go," McAllister told German TV after a rally. First projections are expected once polls close at 6 p.m. and preliminary results are due within an hour.

Merkel, the most popular politician in Germany thanks to her handling of the euro zone debt crisis, hopes a victory for the centre-right in Lower Saxony, an industrial and farming heartland, would give her re-election campaign a boost ahead of the September federal vote.

The comeback in Lower Saxony has turned Germany's fourth-most populous state - a genuine swing state - into a ferocious battleground with Merkel appearing seven times to campaign with McAllister, the West Berlin-raised son of a British soldier.

MERKEL'S "MAC"

McAllister, known as "Mac", has played up his Scottish roots in his campaign, which has featured bagpipes and the jingle "Our chieftain is a Scot/We're a tough clan".

The SPD and the Greens, who had long been comfortably ahead of the centre-right incumbents in polls, have watched in horror as their lead evaporated. Local SPD leader Stephan Weil has been hurt by gaffe-prone SPD chancellor candidate Peer Steinbrueck.

Weil, a solid if less colourful politician, is mayor of the state capital Hanover. He first embraced Steinbrueck during 2012 but has kept his distance since the SPD chancellor candidate blundered - complaining about the pay level for German leaders and saying Merkel has an advantage because of her gender.

Many would blame Steinbrueck if the SPD failed to take power in the state, raising questions about his candidacy and complicating his chances of dislodging Merkel in September.

In a sign of the party's nerves, Steinbrueck and party leader Sigmar Gabriel met privately on Friday to discuss how to react to a defeat, German media reported.

Weil has pointed to polls showing a neck-and-neck race. The CDU were on 41 percent in a final poll on Thursday while the FDP were at the 5 percent threshold needed for seats in the state assembly. The SPD were on 33 percent and the Greens 13.

"Let's put this one in the bag," Weil told a Friday rally.

The CDU have suffered setbacks in the last 12 state elections. Since Merkel's re-election in 2009, it has lost power entirely to the SPD and Greens in four important states: Hamburg, Baden-Wuerttenberg, North Rhine-Westphalia and Schleswig-Holstein.

But even if the CDU wins the most votes, their centre-right coalition could be defeated if the FDP does not clear the 5 percent threshold.

Merkel faces a similar problem at the national level, where the CDU is well ahead of the SPD but doubts remain about whether the FDP will rise from the 4 percent they are getting in polls now.

Even though it is now considered likely the FDP will win at least 5 percent in Lower Saxony, FDP national leader Philipp Roesler could be forced to resign if his party falls short of or just scrapes past the threshold.

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IMF to assess Iran economy in next six months

WASHINGTON | Fri Jan 18, 2013 8:54pm EST

WASHINGTON Jan 18 (Reuters) - The International Monetary Fund will visit Iran in the first half of the year to assess the state of its economy and the impact of Western sanctions, a senior IMF official said on Friday.

The IMF forecast in October that Iran's economy was likely to contract in 2012 and inflation would likely increase to 25 percent.

Masood Ahmed, IMF director for the Middle East and North Africa, said those projections were made before the sharp depreciation of Iran's currency, the rial, at the end of last year.

"We expect that when we revisit these numbers with the more recent data it will show a greater impact than what was estimated at that time," Ahmed added.

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UPDATE 2-IMF sees up to 9.5 bln euro Greek funding gap in 2015-2016

Fri Jan 18, 2013 9:35pm EST

* Greek economy likely to shrink again this year

* Brazil opposes loan tranche to Greece

By Lesley Wroughton

WASHINGTON, Jan 18 (Reuters) - The International Monetary Fund estimated on Friday that Greece faced a financing gap of between 5.5 billion and 9.5 billion euros for 2015 and 2016 and said it had assurances from Europe it would deliver the aid in the final years of the bailout.

It was the first time the IMF had estimated a range of possible financing needs for Greece's international bailout program beyond 2014. The European Commission said in December the money needed for Greece over the two-year period encompassing 2015 and 2016 would amount to 5.6 billion euros.

Greece, the epicenter of the European debt crisis, has received tens of billions of euros in emergency loans from its euro zone partners and the IMF since mid-2010 to stave off bankruptcy. Its economy is likely to shrink for the sixth consecutive year in 2013.

Tensions between the IMF and Europe flared in November over how to reduce Greece's large debt load, which threatened to delay the next aid tranche to Greece in a year where the program had already suffered setbacks from elections and lack of reform.

Questions also arose over whether Europe would continue to support Greece financially without further reforms, prompting concerns that Athens would need to exit the euro zone.

IMF mission chief for Greece Poul Thomsen told reporters that Europe had promised it would continue to support Greece. Funding estimates were "subject to a lot of uncertainty" and would be reassessed regularly, he added.

Under IMF rules, loan programs need to be fully financed for a 12-month period or the IMF withholds loan disbursements.

Thomsen said the Greek program was fully financed "well into 2014," although it was too early to say whether the additional funding for Athens would be needed at the start of 2015 or towards the end of 2014.

"The undertaking of the European partners to fill the gap, whatever that gap will be in 2015-2016, is entirely in line with our policy even if they are not concrete about it," Thomsen told a conference call with reporters. "What is key is that the Europeans know there is a gap and whatever the gap is, they will have to fill it."

EXPOSURE TO GREECE

The IMF board agreed on Wednesday to pay the next aid tranche of 3.24 billion euros to Greece under the 240 billion-euro international bailout involving a troika of lenders including the IMF, European Union and European Central Bank.

Brazil, which has long expressed concern over the IMF's large financial exposure to Greece, opposed the decision, arguing that the prospect of Greece regaining market access in the medium term was "highly doubtful."

"It is unclear whether the current program provides reasonably strong prospects of success," Paulo Nogueira Batista, IMF executive director for Brazil and 10 other countries in Latin America and Asia, said in a statement to the board.

IMF staff also questioned in documents released on Friday whether Greece would be able to repay the IMF if its program "went irretrievably off track" and Europe halted support for Athens.

Euro zone governments agreed last year on a debt buyback program for Greece among a series of steps to cover the debt-strapped country's financing needs.

Thomsen said Europe had not said exactly how it would provide additional debt relief, but options included reducing interest rates on Greek loans.

"The key is that Europe has recognized for the first time that debt is not sustainable without direct transfers in one form or another from Europe to Greece and that there is a commitment to do that," he added.

Thomsen said confidence was returning to Greece and there was renewed interest from investors in the country, although he cautioned that the country still faced immense challenges.

"There is clearly an improvement in confidence compared to where we were in the middle of last year," he said.

He said the new Greek government was determined to crack down on tax evaders and to boost tax revenues, although there had been no significant impact on tax collections so far.

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Fed official alleges Geithner may have alerted banks to rate cut

Fri Jan 18, 2013 11:59pm EST

* Richmond Fed's Lacker resurrects 2007 allegation

* Geithner said in 2007 that claim was not accurate

* U.S. Treasury declines comment on latest Lacker statement

* Disclosure of rate cut plans would be highly unusual

By Alister Bull

WASHINGTON, Jan 18 (Reuters) - In the summer of 2007, as storm clouds gathered over the world's financial system, then-New York Federal Reserve President Timothy Geithner allegedly informed the Bank of America and other banks about the possibility the U.S. central bank would lower one of its critical interest rates, according to a senior Fed official.

Jeffrey Lacker, the head of the Richmond Fed, originally raised the allegation during a Fed conference call in August 2007, and he stuck to his 5-year-old claim against the current U.S. treasury secretary in a statement provided to Reuters on Friday.

"From conversations I had prior to the video conference call on August 16, 2007, I was aware of discussions among a few large banks about borrowing from their discount windows to support the asset backed commercial paper market," Lacker said in the statement. "My understanding was that (New York Fed) President Geithner had discussed a reduction in the discount rate with these banks in connection with these initiatives."

According to transcripts of the call released by the Fed on Friday, Geithner at the time denied that banks knew the Fed was considering cutting the discount rate. The Fed regularly releases transcripts of its policy meetings with a five-year lag.

"We don't have any comment beyond the transcript," said Treasury spokesman Anthony Coley. The Treasury declined to make Geithner available to comment.

Information about any planned interest rate move by the Fed is among the most sensitive as it can have a huge impact on a range of financial markets worldwide. That was particularly the case in the summer of 2007 when there were growing concerns about financial stability as a crisis that would reach fever pitch just more than a year later began to build.

Private disclosure of confidential, market-sensitive information by the central bank would be highly unusual, but it was not immediately clear if it would be illegal. It also was not clear if strict Fed internal rules governing confidential information would have been breached, or whether any internal or external investigation was mounted. Lacker made no suggestion of wrongdoing by the banks as a result of getting hold of any information.

The central bank delivered a surprise cut in the discount rate, which governs direct loans it makes to banks, the day after the call. The action spurred a big stock market rally, with the Standard & Poor's 500 Index enjoying its best gain in 4-1/2 years.

In his statement to Reuters, Lacker did not say which banks may have been privy to the information, although in the transcript of the Aug. 16, 2007, call he said he had discussed the matter with Bank of America's then CEO, Ken Lewis, earlier that day. The Richmond Fed supervises the Charlotte, North Carolina-based bank.

Spokesmen for the Federal Reserve Board in Washington, the New York Fed and Bank of America all declined to comment, as did Lewis.

FIRST IN SERIES OF RATE CUTS

The unusually large half-point cut in the discount rate to 5.75 percent that the Fed delivered on Aug. 17 was the first in a long series and came just days after French bank BNP Paribas froze three investment funds that were facing heavy redemptions. A month later, the Fed would also cut the overnight federal funds rate, its primary lever to influence the economy.

During the Fed's Aug. 16, 2007, conference call, Geithner said that banks had started to ask about borrowing from the Fed earlier in the month after the central bank had released a statement saying it stood ready to provide liquidity to credit markets.

Geithner said banks "obviously don't have any idea that we're contemplating a change in policy" - a statement that Lacker then questioned.

"Did you say that they are unaware of what we're considering or what we might be doing with the discount rate?" Lacker asked, according to the transcript.

Geithner said yes, and Lacker followed up: "I spoke with Ken Lewis, president and CEO of Bank of America, this afternoon, and he said that he appreciated what Tim Geithner was arranging by way of changes in the discount facility. So my information is different from that."

Geithner responded, "I cannot speak for Ken Lewis, but I think they have sought to see whether they could understand a little more clearly the scope of their rights and our current policy with respect to the (discount lending) window."

"The only thing I've done is to try to help them understand ... what the scope of that is," he said.

Geithner, who is stepping down from his Treasury post next Friday, was an advocate of aggressive action to stem the crisis, and the steps the central bank took are widely credited with helping to calm the financial storm. Lacker was less inclined to intervene in the markets.

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Euro zone to tackle thorny question of aid for bank

Fri Jan 18, 2013 5:50am EST

By Jan Strupczewski and John O'Donnell

BRUSSELS Jan 18 (Reuters) - Euro zone finance ministers will discuss on Monday which banks could be given direct aid from the bloc's bailout fund, embarking on a divisive debate that includes doubts about whether such a step should be taken.

Direct bank recapitalisation is meant to break the vicious circle between highly indebted governments that borrow more to recapitalise their banks which need support because they own bonds of those states. But the Eurogroup of euro zone ministers will confront deep divisions on the issue.

"There are still very divergent views between countries. The Eurogroup next week is just a beginning of the discussion," one euro zone official involved in the talks said. Others warned of the heavy cost of the European Stability Mechanism (ESM)recapitalising banks.

"This whole process will end with a compromise that nobody will be fully satisfied with," the official said, adding some progress could be made on the issue by March.

Euro zone leaders agreed last June that the bank-state loop must be broken and that the 500 billion euro ESM bailout fund should be able to buy bank equity to ease the debt burden on already struggling sovereigns.

The decision was mainly meant to help Spain, where the banking sector has been hit by the collapse of the property market and the government was struggling to regain market confidence amid a recession and record high unemployment.

Ireland, Greece and Portugal also have high hopes for the recapitalisation tool because they borrowed billions from the euro zone to recapitalise their banks.

But Germany, Finland and the Netherlands believe that the ESM should be allowed to take stakes only in banks that get into trouble in the future, once the European Central Bank becomes their supervisor in 2014. All previous problems are labelled "legacy" and should be dealt with by national governments, the three countries have said.

This would mean that such direct assistance for banks would only apply if banks ran into fresh difficulty in the future, dramatically cutting the chance of such direct aid.

Such an interpretation could disappoint those who had been under the impression that while the possibility of recapitalisation may open only in a year or so, it could still be applied, retroactively, to banks that are in trouble now.

"The whole point of direct recapitalisation was to solve the current crisis, not a possible next one. That was the spirit of the deal - that Spain would get the recapitalisation loan off its books," a senior euro zone official said.

But officials also said the issue lost much of its urgency because Spanish bank recapitalisation needs turned out much lower than expected and the European Central Bank restored confidence in Spanish debt by declaring it would buy a potentially unlimited amount of it, if Spain asked.

Further removing the need to hurry, euro zone leaders gave ministers until June 2013 to sort out the operational details of direct recapitalisation.

Countries have also been warned by officials of the high costs that come with any direct aid by the ESM for banks because of the risks attached to becoming a shareholder.

"Essentially, bank equities are a more expensive asset to hold than member states' bonds - you would have to put more capital aside," said a second.

"So the question is whether you have the capacity to do a lot of it. It's difficult to see how you would underwrite whole banking systems. It's helpful because it breaks the link between banks and sovereigns but it's expensive."

A second official said: "Banking recapitalisation should be reduced to as little as possible."

Adding to the complexity is the fact that if the ESM becomes the owner of banks, it could get sucked into the problems of managing those institutions, such as addressing how the different banks it owns compete with one another.

The prevailing view is that the ESM should only step in to recapitalise a financial institution as a last resort, when the bank has failed to raise the money from private investors and the government is not fiscal strong enough to help either.

But the consensus seems to end here. Some officials would like to see the most risky assets of the troubled banks moved to a "bad bank", which would then be the responsibility of a government, while the ESM recapitalised the viable rest.

Others point out that after a bank shifts loans at risk of non-payment to a bad bank, it is likely to become attractive as a business again, so there should be no obstacle to seeking capital from private investors or even the government.

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PRESS DIGEST-Canada-Jan 18

Fri Jan 18, 2013 5:01am EST

Jan 18 (Reuters) - The following are the top stories from selected Canadian newspapers. Reuters has not verified these stories and does not vouch for their accuracy.

THE GLOBE AND MAIL

* Two class action lawsuits were filed against the federal government in Canada after the human resources and skills development department lost a portable hard drive containing personal information about more than half a million people who took out student loans.

The department said last week the device contained data on 583,000 Canada Student Loans Program borrowers from 2000 to 2006. ()

* The federal ethics commissioner wants to talk to Finance Minister Jim Flaherty about his letter to the Canadian Radio-television and Telecommunications Commission (CRTC) after it was revealed that he wrote to the arm's-length broadcast regulator in support of a constituent's bid for a radio licence. ()

Reports in the business section:

* More Canadians went online to do their Christmas shopping this year, according to a new report by MasterCard Advisors.

Canadian consumers spent C$2.8 billion ($2.84 billion) shopping online in December, up 26 percent over the previous year and representing about 6.6 per cent of the month's total retail sales. ()

NATIONAL POST

* Three Quebec City teens have been arrested over charges of planning a shootout at their high school.

The three teens, two boys aged 14 and 15 and a 16 year old girl, who have pleaded not guilty, face charges of conspiracy to commit murder and will remain detained until a bail hearing on Monday. ()

FINANCIAL POST

* The blowout in price between Alberta's heavy oil and the North American benchmark price is a "longer term issue" with no quick fix, Alberta Investment Management Corp (AIMCo) CEO Leo de Bever said. ()

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TEXT-S&P rates Willow No. 2 (Cayman) series 7 credit-linked notes

Fri Jan 18, 2013 5:22am EST

Jan 18 -

OVERVIEW

-- We have assigned our 'A-' rating to Willow No. 2 (Cayman)'s series 7 notes.

-- The Willow No. 2 (Cayman) series 7 transaction is credit-linked to Dell Inc. as the reference entity under the credit default swap.

Standard & Poor's Ratings Services today assigned its 'A-' credit rating to Willow No. 2 (Cayman) Ltd.'s $20 million fixed-rate credit-linked secured limited-recourse notes series 7.

Willow No. 2 (Cayman) is a bankruptcy-remote special-purpose entity (SPE) incorporated as a segregated multi-issuance company with limited liability in September 2010 under Cayman law.

This transaction comprises credit-linked notes (CLNs) that reference debt issued by Dell Inc. via a credit default swap (CDS). On the issue date, the SPE entered into a swap with Barclays Bank PLC (A+/Negative/A-1). Under the terms of the swap, the SPE pays to the swap counterparty the note issuance proceeds and in return the swap counterparty will deliver eligible credit support to the issuer under the terms of a credit support annex. This eligible credit support can be cash denominated in U.S. dollars, British pounds sterling, yen, or euro, or can be sovereign debt of the U.S., U.K., Germany, or Japan.

Payments of interest and principal on the notes depend on payments by Barclays under the swap. On each interest payment date, Barclays will pay Willow the same amount of interest and principal that Willow is due to pay the noteholders on that date.

The Willow series 7 notes will pay interest semiannually at a fixed rate of 4.35% per year. Interest payment dates are the 20 June and 20 Dec. of each year, up to and including Dec. 20, 2022, which is the CLN's scheduled maturity date.

The transaction documents do not mitigate the counterparty risk under the swap, or the risk of the custodian's creditworthiness deteriorating. If a default, restructuring, or repudiation affected all four sovereigns, the transaction could redeem early, with a potential loss.

Therefore, our rating on the CLN is linked to the lower of the issuer credit rating on the following entities:

-- Barclays Bank PLC (A+/Negative/A-1), as swap counterparty.

-- Dell Inc. (A-/Stable/A-1), as reference entity.

-- Citibank N.A. (A/Negative/A-1), as custodian.

-- Highest rated entity of the following sovereigns, as asset issuers: Germany (AAA/Stable/A-1+, unsolicited ratings); U.S. (AA+/Negative/A-1+, unsolicited ratings); U.K. (AAA/Negative/A-1+, unsolicited ratings); and Japan (AA-/Negative/A-1+, unsolicited ratings).

Accordingly, in light of the 'A-' rating on Dell Inc., we have assigned an 'A-' rating to these notes.

RELATED CRITERIA AND RESEARCH

-- European Legal Criteria For Structured Finance Transactions, Aug. 28, 2008

-- Global Methodology for Rating Repackaged Securities, Oct. 16, 2012

-- Counterparty Risk Framework Methodology and Assumptions, Nov. 29, 2012

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BB&T profit rises on higher income from mortgage banking

Thu Jan 17, 2013 5:54am EST

Jan 17 (Reuters) - Regional bank BB&T Corp's quarterly profit rose 29 percent on higher income from its mortgage banking business.

Net income available to common shareholders rose to $506 million, or 71 cents per share, in the fourth quarter, from $391 million, or 55 cents per share, a year earlier.

Mortgage banking income rose 71 percent to $231 million.

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